DP13321 Organizing Global Supply Chains: Input Cost Shares and Vertical Integration

Author(s): Giuseppe Berlingieri, Frank Pisch, Claudia Steinwender
Publication Date: November 2018
Date Revised: November 2018
Keyword(s): direct requirements, input output relationship, intrafirm trade, Supply Chains, vertical integration
JEL(s): F10, F14, L16, L23, O14
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13321

We study whether and how the technological importance of an input - measured by its cost share - is related to the decision of whether to "make" or "buy" that input. Using detailed French international trade data and an instrumental variable approach based on self-constructed IO tables, we show that French multinationals vertically integrate those inputs that have high cost shares. A stylized incomplete contracting model with both ex ante and ex post inefficiencies explains why: technologically more important inputs are "made" when transaction cost economics type forces (TCE; favoring integration) overpower property rights type forces (PRT; favoring outsourcing). Additional results related to the contracting environment and headquarters intensity consistent with our theoretical framework show that both TCE and PRT type forces are needed to fully explain the empirical patterns in the data.